What does zero inflation mean for the Indian economy? | Business Standard Editorials

What does zero inflation mean for the Indian economy? | Business Standard Editorials


The perennial pressure
being put on RBI for a cut in base rates is not justified by the realities on
the ground. For a moment, let us accept that time is ripe for a cut in RBI’s
base rate. Then, irrespective of RBI’s decision, market will take cognizance of
the situation and start behaving. The recent initiatives by major banks to
first reduce deposit rates with a feeble message that once cost of funds come
down, banks will consider bringing down lending rates signals this.

FM Jaitley has understood
this when he made the following 
observation in his key note address at the Citi Investor Forum in New
Delhi on November 17,which was a welcome departure from the past:

 “Inflation, especially food inflation, has
moderated in the last few months and global fuel prices have also come down.
Therefore, if RBI, which is a highly professional organisation, in its wisdom
decides to bring down the cost of capital, Reduction in the cost of capital, it
will give a good fillip to the Indian Economy”

The FM’s reference was to
the measures from RBI to reduce cost of capital, though a section of the media
and analysts took a narrow interpretation that ‘FM bats for a rate cut by RBI’.

It is being forgotten
that in India interest rates stand deregulated for long now and there has not
been direct correlation between base rates of RBI and the deposit and lending
rates of banks. Even the rates offered by banks for FDs of same tenure vary by
up to one percentage point, while the interest rates charged for the same type of
loans by the same bank widely vary depending on risk perception and other
relevant considerations.

M G Warrier,


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